1. Debt Management Analysis
1. Yes and no. I do not believe these debts hinder their ability to reach their
financial goals, but at the same time they are cutting it really close. IF you do
not include their tax return. In total they spend $7,564.31 in monthly
expenses. Which includes all liabilities and also assuming they pay the
minimum balance every month on their credit cards. Which leaves them with
$1,618.69 every month. I do believe they should pay off certain debts, and
not all before they start funding their goals. I believe they should go ahead
and pay off the remaining balance on the two student loans they have, simply
because by October of 2015 they will have made their last payment and be
debt free on both students loans. They should also pay off their master card.
Especially if it will only take 6 months if they pay more than the minimum
each month, approximately $140 a month. While they pay that card they
should pay the minimum payment on the AME card until they have finished
paying off the MasterCard, then they should start paying more than the
minimum, which would be around $500 a month, for roughly 11 months.
2. It is very possible for them to pay their credit card debt within 2 years. My
advice would be to obviously pay off the card with the highest interest rate
first, the MasterCard with a rate of 14.25%, as that balance could get out of
control if they do not attack it first. If they want to be credit card debt free
they would have to pay more than the minimum, which would be 20% of the
balance, which would put them at $140 a month for the master card. Doing
so, would allow them to pay off that card in 6 months. While paying the
MasterCard I suggest they pay the minimum payment on the AMEX until they
are completely finished with the MasterCard. This way they can have a little
more money in their pockets each month, until the MasterCard is paid off.
After 6 months has passed and the MasterCard is now paid off, then they
should begin attacking the AMEX. This card has a much higher balance but
lower interest rate. Luckily they would have been paying the minimum
payment of $40 for 6 months now which goes towards interest so the balance
should be pretty much the same. This card will take 11 months to pay off if
they pay more than the minimum, which would be $500 (10% of balance).
But now they only have this card to deal with.
a) Yes they will reach their goal of paying off their credit card debt in 2
years. In fact it will take 16 months.
b) Yes they should wait. After all their expenses are paid they will only
have $1,618.69 left over BEFORE the debt is calculated in each
month. They simply cannot afford to save for college right now.
3. They can achieve their goals, but it will take longer than they want it to. They
might actually have to pay the minimum payment on the AMEX card longer
than they expect to, so they can save up a little. Also, this may sound horrible,
but I suggest they cut charitable contributions in half for a year. That extra
$400-$500 will be crucial in achieving their goals. That extra cash could go

2. towards the AMEX card or the 6.0% interest rated student loan. Once those
credit cards are paid off they should cut up the MasterCard, as it has the
highest interest rate and will be more of a burden than pleasure. They really
do not have to pay the AMEX off completely, this will also give them some
space. It looks good on your credit report when you have some credit use.
Just keep the card below 40% of the limit.
Housing Analysis.
4.
a) For the 30 year FIXED rate the front end costs would come out to $37,650
and the monthly mortgage payment would be $877 not including utility
expenditures. For the 30 year ARM mortgage the front end cost come out to
the same which is $37,650 but the monthly mortgage payments will come
out to $797 which also does not include the utility expenditures.
b) The monthly payments could go up to $904 in the next year. Over the life of
the loan the mortgage could increase to $1,934.
c) I would recommend the 30 year FIXED-rate mortgage. Although the ARM
has a lower interest rate to start out with, who is to tell that the housing
market will become worse over the 30 year span. With the amount of long
term goals Spencer and Ashley have and also the 3rd kid coming on the way,
it is far too risky to use the ARM to save them only $100 a month versus
risking paying $1,000 more in 20 years.
5. The good thing about making a larger down payment is it would decrease their
monthly payments. But more importantly they would not have to pay that $700
private mortgage insurance fee, this saves them $21,000 in the 30 year span. I
recommend they put exactly 20% of the price of the house.
6. They do qualify when applying the two affordability ratios. But when it comes to
the housing payments they do not qualify. In other words they are not ready to
move. Either Alisha gets a better job or they stay in their current house.